Income up, but spending flat

Tuesday

Jan 31, 2012 at 2:00 AM

With Americans increasing savings, job creation is cast as the prime mover for the economic recovery.

MARTIN CRUTSINGER

WASHINGTON — Americans' income rose in December by the most in nine months, a hopeful sign for the economy after a year of weak wage gains. But consumers didn't spend any more than they had in November.

Americans ended up saving all their additional income.

Economists noted that income rose last month largely because of strong hiring. The economy added 200,000 jobs in December. More jobs mean more income available to spend.

The best hope for the economy is further job gains. On Friday, the government is expected to report another solid month of hiring for January.

Income rose 0.5 percent from November to December, the Commerce Department said Monday. It was the sharpest increase since a similar gain in March.

The flat spending in December followed scant gains of 0.1 percent in both October and November.

For all of 2011, income barely rose. And consumers tapped their savings to spend more.

But in December, Americans boosted their savings. If they continue to save any additional income rather than spend it, the economy could slow. And that could force employers to pull back on hiring.

Consumer spending accounts for about 70 percent of economic activity.

Many economists are holding out hope, though, that continued job gains will mean more spending across the economy.

"The pace of job growth in recent months, while still not satisfactory compared to most past cycles, at least seems sufficient to generate enough income growth to keep consumer spending moving ahead at a modest pace," said Joshua Shapiro, chief U.S. economist at MFR, Inc.

After-tax income adjusted for inflation rose 0.3 percent in December. For the year, inflation-adjusted income rose 0.9 percent. That was just half the rise in 2010.

Inflation-adjusted consumer spending rose just 2.2 percent last year. It was slightly better than the increase in 2010.

One reason for the conflicting data is the consumer spending report covers a wider range of goods and services not measured by the retail sales report, such as utilities, airline tickets and hotel rooms.

Joel Naroff, chief economist at Naroff Economic Advisors, also notes that the consumer spending report comes out a few weeks after the retail sale report, so it has more complete data.

Nonetheless, Naroff was encouraged by the large gain in income in December. He said it reflected the solid number of jobs created.

"More jobs created mean more income and more consumer spending," Naroff said.

Unemployment fell to 8.5 percent last month — the lowest level in nearly three years — after a sixth straight month of solid hiring.

Economists predict that 155,000 net jobs were created in January, according to a survey by Factset. Some are even estimating closer to 200,000. The unemployment rate is expected to stay unchanged.

Still, the economy remains weak. The government said Friday that the economy grew at an annual rate of 1.7 percent last year — roughly half the growth of 2010.

Overall growth last quarter — and for all of last year — was slowed by the sharpest cuts in annual government spending in four decades. And many people are reluctant to spend more or buy homes. Many employers remain hesitant to hire, even though job growth has strengthened.

The outlook for 2012 is slightly better. The Federal Reserve has estimated economic growth of roughly 2.5 percent for the year, despite abundant risk factors: federal spending cuts, weak pay increases, cautious consumers and the risk of a European recession.

The savings rate increased to 4 percent of after-tax incomes in December, up from 3.5 percent in November.

For the year, the savings rate dipped to 4.4 percent from 5.3 percent in 2010. The savings rate had fallen to 1.5 percent in 2005, reflecting a housing boom that made people feel like spending more and saving less.

The December report showed that prices tied to consumer spending edged up 0.1 percent in December and were up 2.4 percent compared to a year ago. This is the preferred inflation measure for the Federal Reserve.

The Fed last week established an annual inflation target of 2 percent.

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.